SM&CR Reforms: FCA CP26/37 Chapter 3 - Proposed Changes to the Senior Managers Regime
The Financial Conduct Authority (FCA) has published CP26/37, Senior Managers & Certification Regime Review: Phase 2, setting out significant proposals to simplify the Senior Managers & Certification Regime (SM&CR) while maintaining strong individual accountability. Published on 22 October 2026, the consultation builds on the reforms introduced under Phase 1 and forms part of a broader effort to reduce regulatory complexity and administrative burdens on firms.
In this three-part series, Compliance Angle examines the key proposals across three chapters of the consultation: Chapter 3 – the Senior Managers Regime, Chapter 4 – the Certification Regime and the Directory, and Chapter 5 – the Conduct Rules.
This first article focuses on Chapter 3 and the proposed reforms to the Senior Managers Regime (SMR). The changes include replacing pre-approval with notification for certain Senior Management Functions (SMFs), removing two existing SMFs, reducing the number of Prescribed Responsibilities, simplifying requirements for Statements of Responsibilities, and extending the temporary cover period from 12 to 18 weeks. We examine these proposals in detail, distinguish between changes affecting all SM&CR firms and those applying specifically to dual-regulated and Enhanced firms, and consider the practical implications for firms preparing for implementation. Importantly, these remain consultation proposals rather than final rules, and existing regulatory requirements continue to apply.
What Does Chapter 3 of CP26/37 Propose?
Chapter 3 applies to all firms already in scope of the SM&CR, including third-country branches, and to firms due to come into scope, such as cryptoasset firms. Dual-regulated firms should read it alongside the PRA's CP14/26, as several FCA proposals are designed to align with, or deliberately differ from, the PRA's approach.
The FCA's stated aim is to keep high standards of individual accountability while making the regime more proportionate and easier to operate. It accepts that some risks may increase, but considers that firms have now embedded the regime well enough to need fewer prescriptive requirements.
The FCA divides the chapter's proposals into two groups:
Proposals that affect only dual-regulated and Enhanced firms: SMF notification, removal of SMF18 and SMF22, a narrower SMF7, time-limited and conditional approvals (also available to solo-regulated firms in dual-regulated groups), higher Enhanced thresholds and changes to Management Responsibilities Maps (MRMs).
Proposals that affect all SM&CR firms: the 12-week rule, SoRs, PRs at Core firms, and the streamlining of SMF applications, forms and reporting.
No changes are proposed to SMF roles at Core or Limited Scope firms, so those firms may wish to focus on the second group.
Proposals for Dual-Regulated and Enhanced Firms
Seven SMFs Would Move from Approval to Notification
The FSM Bill would allow the regulators to stop pre-approving every Senior Manager. The FCA proposes to use this for oversight and assurance roles that do not usually carry day-to-day executive control. At dual-regulated and Enhanced firms, these functions would become notified:
SMF5 Head of Internal Audit
SMF10 Chair of the Risk Committee
SMF11 Chair of the Audit Committee
SMF12 Chair of the Remuneration Committee
SMF13 Chair of the Nomination Committee
SMF14 Senior Independent Director
SMF15 Chair of the With-Profits Committee
At dual-regulated firms, SMF13 and SMF15 are FCA functions and the others are PRA functions. The PRA has proposed making further functions notified. The FCA estimates the change will reduce SMF applications from FCA solo-regulated Enhanced firms by about 15%.
Notification is not a lighter standard. Firms would complete the same vetting before appointment, overseen by the holder of Prescribed Responsibility A, and the Duty of Responsibility and Senior Manager Conduct Rules would apply in full. Notified SMFs would appear on the Financial Services Register, marked as firm-assessed.
The Chief Operations Function (SMF24) would stay pre-approved because of operational risks from frontier AI systems and cyber threats, with a joint review with the PRA two years after implementation.
How the SMF Notification Process Would Work
Before notifying, firms would assess fitness and propriety, including, where required, regulatory references, criminal records checks, right to work checks and a SoR. The FCA would run only automated checks that the form is complete and the individual is not prohibited. Notifications could be made up to three months in advance, taking effect on the start date, or immediately on acknowledgement. Less information would be needed than under the current Short Form A, and the FCA says further detail on the process will follow.
In exceptional cases, the FCA could use its section 55L powers under the Financial Services and Markets Act 2000 (FSMA) to require a firm to seek approval for otherwise notified functions, for example where it has serious concerns about the firm's governance or its ability to assess fitness and propriety. This would apply only to future appointments.
Under the proposed transitional arrangements, firms could keep applying until commencement, could submit future-dated notifications from one month before it, and applications in progress at commencement would still be determined.
Removal of SMF18 and SMF22
The FCA proposes to remove two FCA-only functions: SMF18 (Other Overall Responsibility) and SMF22 (Local Responsibility). It says these functions have been used extensively, including for roles that were never intended to be SMFs. SMF18 accounts for 19% of applications at solo-regulated Enhanced firms, and SMF22 for 24% of applications at dual-regulated branches.
Their PRs and overall or local responsibilities would need to be reallocated to other SMFs, which could mean significant redrafting of SoRs and MRMs even where individuals' roles do not change. The FCA proposes amendments to SYSC 26 and the Code of Conduct sourcebook (COCON) so firms can show accountability through delegation and layered management structures.
It also asks whether the two functions should instead be kept as notified SMFs, in which case those amendments would not be made.
A Narrower SMF7 Group Entity Senior Manager Function
Firms have found it hard to judge whether group executives exercise "significant influence" over an SM&CR firm, leading to cautious SMF7 applications. For solo-regulated firms, the FCA proposes a two-limb test: the individual must exercise significant influence and perform one of these group or sub-group functions:
Chief Executive
Chief Finance
Chief Risk
Chief Operations
Chair of the governing body
Compliance Oversight
Money Laundering Reporting Officer
Firms would need to withdraw SMF7 holders who no longer qualify before the rule changes, and the FCA expects the solo-regulated SMF7 population to fall by about 40%. Unlike the PRA, it does not propose a notification-only SMF7a category.
Time-Limited and Conditional Approvals
Firms cannot currently apply for conditional approval, and any condition requires a decision notice. The FCA proposes that dual-regulated firms, solo-regulated firms in dual-regulated groups and Enhanced firms could apply for time-limited or conditional approval, for example for interim appointments, without a statutory notice. It expects such requests to be rare and has seen no demand from other firms.
Higher Enhanced Firm Thresholds
Having adjusted some thresholds for inflation in Phase 1, the FCA now proposes further increases so the Enhanced regime applies only where scale, complexity or risk justifies it. The proposed thresholds are:
Consumer credit lenders: from £130m to £200m revenue
Asset managers: from £65bn to £100bn assets under management
Intermediaries: from £45m to £75m revenue
Wholesale markets firms: from the Significant SYSC test to £750m in assets, calculated as a three-year rolling average
The mortgage (10,000 mortgages outstanding) and CASS Large thresholds would not change, and the Significant SYSC definition would remain for other purposes. Firms leaving the Enhanced regime would become Core firms. The FCA would also expand its guidance on requiring a firm below the thresholds to comply with the Enhanced regime, including where thresholds are met on a group basis, though it does not expect to use this often.
Management Responsibilities Maps
For dual-regulated and Enhanced firms, the FCA proposes to remove the MRM where only one individual performs SMF roles and to end routine reporting of MRM updates. MRMs would still be kept up to date internally, provided on request and retained for six years (ten for some dual-regulated firms). An MRM submitted with an application should show the intended arrangements after the appointment.
Proposals Affecting All SM&CR Firms
Temporary Cover: The 12-Week Rule Becomes 18 Weeks
The 12-week rule lets a firm cover a Senior Manager's absence without approval for a limited period, and since Phase 1 firms need only submit the SMF application within that time. The FCA proposes extending the period to 18 weeks. Because the statutory deadline for determining applications is due to fall from three months to two, it says the overall time before approval would remain similar.
The "reasonably unforeseen" condition in SUP 10C.3A.6R(2)(b) would be replaced with rules on "reasonable use", based on the Phase 1 guidance in SUP 10C.3A.15G to 17G, with guidance that reallocated responsibilities must have clear accountability. As the PRA is keeping the existing test, the FCA asks whether the change should apply to FCA functions at dual-regulated firms or only to solo-regulated firms.
Statements of Responsibilities
For many firms this may be the most welcome change. With the FSM Bill removing the statutory requirement to provide SoRs, the FCA proposes two changes:
Ending the requirement to submit updated SoRs whenever responsibilities change, which would remove the Form J reporting requirement. Firms would still submit a SoR with an SMF application or notification, keep SoRs up to date internally and keep superseded versions, normally for six years (ten years for some dual-regulated firms).
Removing the SoR requirement entirely where only one individual performs SMF roles at the firm, even if that person holds several functions (for example, SMF3, SMF16 and SMF17). The FCA estimates that this would benefit approximately 18,800 firms. If a second SMF is later appointed, every SMF at the firm would need a SoR.
New guidance in SYSC 24A.8.5G would explain the single-SMF exclusion. The underlying principle remains: responsibilities must be clear and documented, and the FCA can request current or past SoRs.
Fewer Prescribed Responsibilities
The FCA proposes to remove nine PRs and keep four:
PR A, responsibility for the Senior Managers Regime (Core and Enhanced firms)
PR D, responsibility for financial crime (Core and Enhanced firms)
PR Z, responsibility for CASS (Core and Enhanced firms)
PR J-3, responsibility for oversight of outsourced internal audit (Enhanced firms only)
PR A would be reworded to clarify its holder's duties on vetting SMF candidates. Removing a PR does not remove the underlying requirement, only the separate recording of responsibility for it, and firms need not re-record removed PRs unless the SMF role does not make the responsibility clear.
Core firms could update SoRs at their next separate change, while Enhanced and dual-regulated firms would need to update SoRs and MRMs at commencement.
Simpler SMF Applications, Forms and Reporting
The handover document summary and MiFID annexes would no longer be needed with SMF applications, although the duty to ensure effective handovers remains. The Approved Persons forms would move from SUP 10C to the FCA website, with minor simplifications such as dropping the organisational chart. Solo-regulated MiFID investment firms and MiFID optional exemption firms would also stop reporting management body changes under the EU-derived Implementing Technical Standards, including through SUP 15.16, and overseas firms would no longer report Notified Persons on Form F under SUP 15.4.
Key Themes in the Senior Managers Regime Proposals
Three broader messages emerge. First, responsibility for assessing senior individuals shifts from the regulator to firms, so a firm's own fitness and propriety assessment and record-keeping become the main safeguards; the FCA says it may reintroduce pre-approval if firms make unsuitable appointments. Second, accountability is not diluted: the Duty of Responsibility, the Conduct Rules and documented responsibilities all remain. Third, the impact is uneven, with Enhanced and dual-regulated firms facing most of the work.
In our view, the practical risk for smaller firms is that documents no longer sent to the FCA quietly fall out of date. A SoR reviewed only when the FCA asks for it is unlikely to hold up well in supervisory engagement or an enforcement inquiry.
What Should Firms Do Now
Nothing in Chapter 3 is yet in force. Until final rules take effect, current requirements continue, including the 12-week rule, Form J reporting and the existing PRs. For now, the focus should be preparation rather than implementation, and the steps depend on the firm's SM&CR category.
Enhanced and dual-regulated firms should consider:
mapping current SMF18, SMF22 and SMF7 holders against the proposals, and identifying where PRs and overall or local responsibilities would need to be reallocated;
identifying which current SMFs would become notified, and confirming that the firm's vetting and fitness and propriety process (owned by the PR A holder) would stand up without FCA pre-approval;
checking the firm's position against the proposed Enhanced thresholds, including on a group basis, to see whether it could move to Core;
planning the SoR and MRM redrafting that would be needed at commencement; and
for dual-regulated firms, comparing the FCA proposals with PRA CP14/26, particularly on the 12-week rule, SMF7 and PRs.
Core and Limited Scope firms are likely to need much less work: confirming whether only one individual performs SMF roles (so a SoR may no longer be needed), reviewing how PR A, PR D and, where relevant, PR Z are documented, and making sure internal SoRs will be kept current once routine reporting ends.
All firms should allocate responsibility for tracking the consultation, brief senior management, and note any SMF appointments planned for 2027 that the transitional arrangements could affect. Firms with views, for example on the 12-week rule or on keeping SMF18 and SMF22 as notified functions, should consider responding.
Consultation Deadline and Next Steps
The consultation closes on 22 January 2027. The FCA expects to publish final rules in a Policy Statement in the first half of 2027 and to implement them about six months later, in H2 2027. Because the changes depend on the FSM Bill receiving Royal Assent, the FCA will not implement any of them early, and firms should treat the timetable as provisional.
How Compliance Angle Can Help
Compliance Angle supports FCA-regulated firms in understanding and implementing changes to the SM&CR. Our support is practical and proportionate, tailored to each firm's business model, permissions, size and SM&CR category.
Depending on the firm's needs, this can include:
SM&CR support, including gap analyses of current arrangements against the proposals and reviews of SoRs, MRMs and the allocation of Prescribed Responsibilities;
regulatory change implementation, including planning for the reallocation of responsibilities at commencement;
reviewing and updating fitness and propriety, SMF appointment and temporary cover procedures;
risk management and corporate governance support, including Board and Senior Manager briefings on the consultation and its likely impact; and
ongoing compliance support to keep SM&CR documentation current once routine reporting to the FCA ends.
If you would like to discuss how the proposed Senior Managers Regime reforms may affect your firm, please contact us at info@complianceangle.co.uk.
Source: Financial Conduct Authority, CP26/37: Senior Managers & Certification Regime Review: Phase 2, published 22 October 2026.
